Insight's $581m deal to acquire California-based reseller PCM breaks some of the IT channel's most basic M&A practices.
Resellers with a dominant position in their home market don't typically acquire for market share in their own backyard, and will instead look to buy companies that either have skills in sought-after technology and services areas, or that have developed their own IP.
Take German VAR Bechtle's double acquisition in Germany at the end of last year. It acquired a security specialist called Bücker Datentechnik, which added 43 skilled staff in a technology area with a severe shortage of skills. It also acquired computer-aided design (CAD) software specialist Coffee, boosting Bechtle's headcount to 450 staff in this space.
Bechtle already has a dominant position in its core product and managed services business in its home market, with around 70 system houses across Germany, Switzerland and Austria. The prospect of Bechtle acquiring a large competitor in this space seems laughably unlikely; where would the logic be in that?
It's only when expanding in a new geography that acquiring around your core strengths seems logical. Take Bechtle's buyout of €420m reseller Inmac Wstore in France, or Computacenter's deal for infrastructure reseller FusionStorm in the US.
In both cases, Bechtle and Computacenter approached acquiring in a relatively new geography by sticking to their product-selling roots.
So, taking these common M&A practices into account, why would Insight spend $581m on acquiring in a geography and business area where it is already considered a dominant player? It breaks the rules of conventional M&A.
Insight's EMEA boss Wolfgang Ebermann even scoffed at the notion of acquiring a traditional reseller in a recent interview.
"What would be the benefit for us to do that, versus growing our relevance across the different stakeholders where there is a big need at our client side to ask for help?" he said.
"Will that grow our relevance in an area where it's not about price competition, but it's about driving business outcome? If you listened to that, where would you invest?"
Insight's and PCM's 2018 financials reveal an almost identical sales mix. PCM draws a quarter of its $2.16bn revenues from reselling software and 26 per cent from selling notebooks, tablets and desktops, according to its recent Q1 results. Only eight per cent of PCM's revenues come from services and its operating profit margins stand at a measly 1.9 per cent judging from its full-year 2018 financials.
To PCM's credit, the firm hugely grew its profitability between 2017 and 2018, with operating profit jumping by 283 per cent to $40.7m for the 12 months until 31 December 2018.
Insight meanwhile draws around 21 per cent of its US revenues from reselling software, while 67 per cent stems from hardware and just 12 per cent from services.
And it's not like PCM will open the door to any new markets. The firm merely adds to Insight's already strong presence in the UK and Canada where PCM turns over $62.36m and $195.85m respectively.
The PCM deal is hugely costly at $581m, coming at a whopping 36 per cent premium on PCM's share price as a one-month closing average.
And it will take around 18 months for Insight to make the majority of its forecasted $70m in annual cost synergies in integrating the PCM business.
The deal marks a deviation from the measured and targeted M&A strategy Insight has been adopting over the last four years. It instead has undertones of SoftwareONE's mammoth merger with Comparex last year, marking a complete deviation from Insight's focus on acquiring innovative IP to grow its own product offering and its Digital Innovation business.
PCM is nothing like BlueMetal, Cardinal Solutions or Caase.com - all innovative companies that Insight has acquired over the last four years to grow its relevance in digital transformation.
Unlike its previous acquisitions, there's nothing in the PCM business that can be leveraged across Insight's EMEA and APAC regions, other than $62.3m in revenues for its UK arm.
But what's undeniable is that, while Insight is a $7.1bn giant today, there's plenty of market share up for grabs across its key verticals. CDW, for example, is a $16bn-revenue monster but claims to only have a five per cent share of a $290bn addressable market in the US, Canada and the UK. So Insight's deal for PCM, which adds 4,000 staff and 40 offices globally, could be seen as a bid for market share in a market that remains hugely fragmented.
But perhaps viewing the PCM deal purely through the lens of adding market share is missing the point. Maybe it's not about what PCM adds to Insight, but rather what Insight can add to PCM. The deal opens up a large PCM customer base to which Insight can sell more of its innovative solutions acquired through Caase.com, Cardinal Solutions and BlueMetal - and adds a more complete services offering to existing PCM customers.
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